Low-risk strategies to fund business growth

A common concern I often hear from business owners and startup entrepreneurs is where the money will come from to fund future growth. For some, that might require outside investors, which in turn can mean giving up partial ownership or control.

But most businesses can grow successfully by using one or a combination of other financing approaches that don’t require major commitments or outside investors.

The idea is to prepare and position your business for growth so you don’t miss out on growth opportunities when they arise. A big part of that is not only keeping your current balance sheet in shape, but also lining up potential funding sources.

It starts with understanding the different options, and that alone can be challenging. For example, an American Express survey found that 34percent of business owners believe — incorrectly — that a business “term loan” (funded immediately for a set term and amount) and a “line of credit” (which you open and tap as needed) are essentially the same. And nearly 40percent believe it’s a good idea to apply to as many lenders as possible when seeking a loan, when the opposite is true. (Multiple applications can harm your credit rating.)

Here are five ways to position your business for all the future funding you’ll need:

Reinvest your profits: The best source of “venture capital” for an existing business is money you’re already generating. This is “patient” capital that builds value in your business without debt and without giving up shares to others.

Many entrepreneurs miss growth opportunities by spending profits in unproductive ways. Others take the opposite extreme, pumping every penny into the business while taking nothing for themselves.

Both can backfire. If you do need to seek a loan, lenders will prefer that you pay yourself a reasonable salary. They want to know the business can be profitable even if those running it get paid.

Tap into trade credit: “Trade credit” is a way to put off payment for goods and services your business purchases from suppliers and vendors. You may find vendors more than willing to sell on credit to a growing business — and even to a startup — if you can strike a long-term deal to buy from them.

And from your perspective, trade credit is also one of the safest forms of business borrowing. Bank debt is dangerous because payments are still due even if sales drop. But if sales drop so will your orders, so your level of trade credit drops too.

Trade credit may also be more readily available than bank or other types of loans. And it lets you spread payments over months or even years with little or no down payment and generally favorable rates.

Line up a credit line: The time to establish a line of credit is when you have the ability to qualify for one and might not really need it. Having a line of credit can help you grow by providing ready financing when opportunities arise. A line of credit is also vastly preferable to using credit cards that carry much higher interest rates and other onerous terms. But use your credit line cautiously. Lines are meant to be tapped as needed, then paid off so they are available again the next time.

Establishing a credit line is cheap, you only pay interest on what you borrow and you can use the line for almost anything. Start small — basically with whatever size line a lender is willing to provide. The important thing is to get a foot into the bank financing door. Once you have it, put it to use and pay it off diligently and always on time.

Expand your banking relationships: If you have accounts with only one big bank, consider opening additional accounts at a regional or community bank (or vice versa). That will give you more options when it comes time to look for loans, lines or other services to support your growth plan.

Consider alternative sources: A few options include credit unions you may be eligible to join, accounts receivable financing (also called “factoring”), and so-called “peer-to-peer” lending. Peer-to-peer (or person-to-person) lending is handled online through a variety of web-based services that function as intermediaries, including Prosper (www.prosper.com) and Lending Club (www.lendingclub.com).

Reach Daniel Kehrer at bizbest.com. Follow him at twitter.com/140Main.

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